For the following questions, consider the figure below. Initially, the economy is at the equilibrium in point A. Wage 16 14 12 10 8 69 4 2 LD₁ 6 78 ·a LS A LD 2 > 3 Quantity of labor (in millions) a. If a crisis moves the labor demand to the curve LD₁ and wages are flexible, what is the new equilibrium wage? What is the new equilibrium wage if wages are downward rigid? b. If an overheated economy moves the labor demand to the curve LD2, will the unemployment rate change? What do you expect to happen with the price levels? Explain why this situation is also a problem for the policy-maker. c. Cite one fiscal policy and one monetary policy that the government or the Fed can enact to reduce the rate of inflation. Be specific.

For the following questions, consider the figure below. Initially, the economy is at the equilibrium in point A. Wage 16 14 12 10 8 69 4 2 LD₁ 6 78 ·a LS A LD 2 > 3 Quantity of labor (in millions) a. If a crisis moves the labor demand to the curve LD₁ and wages are flexible, what is the new equilibrium wage? What is the new equilibrium wage if wages are downward rigid? b. If an overheated economy moves the labor demand to the curve LD2, will the unemployment rate change? What do you expect to happen with the price levels? Explain why this situation is also a problem for the policy-maker. c. Cite one fiscal policy and one monetary policy that the government or the Fed can enact to reduce the rate of inflation. Be specific.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter21: Unemployment

Section: Chapter Questions

Problem 35CTQ: While unemployment is highly negatively correlated with the level of economic activity, in the real...

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